President Obama announced his plans to aid global development last week at the U.N. summit on the Millennium Development Goals (MDGs). Obama pledged the United States’ continued help in aiding poor and developing countries. Obama also announced new plans for the United States’ global development policy, taking a step towards fulfilling his promises to reform United States’ foreign aid programs in order to improve efficiency and to increase the amount of U.S. international aid to $50 million by 2012.

The U.N. adopted the MDGs in 2000. The MDGs are a group of goals that the U.N. is committed to reaching by 2015, including improving access to education, promoting gender equality, advancing health care and reducing poverty levels.

Obama encouraged the U.N. to increase its actions, asserting that if it continued with the status quo it would be unable to meet any of the MDGs. The President announced that the U.S. would update its current foreign aid, by not just doling out supplies such as food and medicine, but by working with nations over time to improve and establish sustainable economies. Obama declared that supplying goods only helped poor countries temporarily; it did not facilitate these countries’ development.

The President stated that the U.S. would help cooperative nations that wished to develop investments and trade. He emphasized that in order for an economy and nation to prosper, its government must be honest and free from corruption. Obama pledged that the United States would help countries which previously had authoritative governments, but now had democracies in place. Obama praised Liberia as a model country that has started to transform its government and economy after being riddled with years of governmental corruption and violent civil wars.

The President also voiced his belief that the U.S. should not be the sole country initiating reform in its foreign aid policies. Obama stressed that not only other governments, but also the private sector entities such as foundations and NGOs needed to continue to be committed to fixing the world’s poverty and economic problems.

Discussion:1. Will working with nations to develop economic and social policies help developing countries? Are there any disadvantages to this kind of reform?2. What factors should the U.S. consider when deciding which countries to support with foreign aid? Should the type of government of the country matter?

The International Monetary Fund (“IMF”)is undergoing a structure change to increase the power of emerging nations in the IMF. The IMF has long been accused of being too Eurocentric, with Europe having 9 of 24 executive board members and 30% of total voting power. Europe only produces 20% of world GDP, making it overrepresented on a GDP basis.

An 85% supermajority is required to maintain current composition of the 24-member council, which is actually 20 members, but the extra four slots are always approved. The United States essentially vetoed the proposed 24-member council in August, an action which surprised Europeans, by not approving the renewal of the incumbent 24-member council with its 17% of the vote. The four members set to lose their seats were: Brazil, India, Argentina, and francophone African countries sharing a seat. Not having Brazil or India on the executory board will undercut the IMF’s authority as a world financial institution, one economist said, going so far as saying the IMF would be a “laughing stock.”

United States action, coupled with Asian and African political pressure, has resulted in structural reform manifested in a 5% quota shift (voting and contribution) from Europe to Asia, Africa, and South America to be approved in the G-20 meeting in Seoul, Korea on Nov. 11-12. The quota in the IMF is the proportion of funds contributed by a certain member which corresponds to voting power. For example, the United States contributes 17% of total IMF funding and, thus has 17% of the vote.

The terms of the reform are not certain, as the G-20 approval is the first step in reform, and many nations are still clamoring for more change. Accompanying the change in representation within the IMF is a massive increase in funding from its members. The G-20 agreed to triple the IMF’s resources to $750 billion, with some thinking it likely the IMF will increase to $1,000 billion soon. Thus, emerging nations will receive more votes at a time when the IMF could quadruple its resources, a combination sure to greatly increase the flow of IMF money to the emerging world.

Also, the reforms have been privately resisted by some European members. They argue the IMF has done a good job, especially in the 1990’s, of admitting and incorporating new members. The German Finance Minister, Mr. Schauble, demanded the U.S. give up its veto power in exchange for decreased European voting power, an “opening gambit” the U.S. quickly declined. With so many parties involved, the negotiations are bound to be lengthy and tedious.

The IMF reforms reflect a shift in world economic power; a shift the World Bank recognized earlier this year by changing its own board to increase emerging market influence. The financial crisis, coupled with general economic trends, has left the United States and Europe growing slowly, while the recovery elsewhere has largely been more successful. Emerging markets warrant their claims to power with the reality of the world; a claim Europe is finding hard to deny.

Discussion:

1. What interest(s) does the United States have in using its veto to help emerging economies and reduce European power in the IMF?

2. Will this shift in power make any difference if the U.S. and Europe still have a veto (having more than 15% of voting power)?

Brazil’s government made a concrete decision to protect the value of its currency (the real) from further appreciation. The real has appreciated 100% since 2003, the year current President Luiz Inácio Lula da Silva took power, and 5% since the end of June 2010. This appreciation makes it cheaper for Brazilian companies and consumers to buy foreign imports, but more expensive for foreigners to purchase Brazilian exports, thus pushing those customers towards other cheaper markets and hurting Brazil’s bottom line. The government has warned that the real’s continued appreciation against the U.S. dollar threatens to derail its current economic growth.

The situation has been further affected by the announcement that the state-owned oil company, Petrobrás, will be making the world’s largest stock offering ever at $78 billion (R$134 billion) after discovering massive oil reserves offshore. Because priority will be given to purchasers in Brazil, foreign investors have flocked to the country, converting their U.S. dollars to Brazilian reais, thus increasing the supply of dollars in the country and increasing the value of the real. This trend should end after the sale, and the flow of dollars in and out of Brazil should return to a lower level.

The Brazilian government has authorized its own sovereign wealth fund to purchase dollars to ease the upward pressure on the currency. By law, those U.S. dollars cannot stay in Brazil so they will be invested in stocks overseas or deposited in foreign banks. The government has also increased the amount of dollars it purchases in daily currency auctions and increased the number of daily auctions to two from one normally to try to lower the value of the real.

The government is walking a fine line with its currency. If the government’s policies are too effective and the currency depreciates too much the country could face inflation, which would likely put the brakes on domestic spending and thus slow any growth driven by domestic consumption. A turn-around in the stagnating U.S. economy could ultimately be the best medicine for Brazil’s currency issues as the dollar would increase in value to maintain the current exchange rate even as the real increases in value.

Discussion:1) How can currency adjustments be justified in an economic world controlled by the “invisible hand” of the free market?2) The U.S. is currently upset with China because of its policy of keeping the yuan artificially low. How do you think that dispute might affect economic issues between the U.S. and Brazil, a country that—like China—has many industries that compete with U.S. industries (ethanol, cotton, and sugar are three good examples)?

The Paris Club announced this week that it would help Liberia with its debt, agreeing to forgive $1.26 billion of the money the West African country owes to creditors within the organization. This comes as an enormous help to the Liberian government, which has been trying in recent years to get national debt under control. At the end of June 2007 the country owed around $4.9 billion to creditors. This amount of debt was eight times Liberia’s gross domestic product, making it the highest debt-to-GDP ratio among all developing countries according to the World Bank. Much of Liberia’s debt is the aftermath of a fourteen-year span of civil wars from 1989 to 2003.

The Paris Club is an organization of nineteen creditor countries that is dedicated to helping debtor countries establish and secure their economies. Several creditor countries formed the Paris Club in 1956, when Argentina decided to meet its public creditors in Paris to try and find a solution to their national debt. Since its establishment, the Paris Club has worked with 87 debtor countries to relieve $543 billion of debt.

Augustine Ngafuan, Liberia’s Finance Minister, reported that a large portion of the country’s budget had been allocated to paying off its debt. This $1.26 billon relief should free up funds for the country to use on social and developmental programs. The Paris Club stated that the debt cancellation was due to Liberia’s continued dedication to reducing the country’s poverty and the implementation of an economic strategy for sustainable growth. Ngafuan indicated that after the debt relief, Liberia would not borrow money again because the country is able to operate on a balanced budget and has not borrowed money from creditor countries since 2006.

This is not the first time Liberia has been able to cut its debt dramatically. In April of 2009, the country paid off $1.2 billion in debt by reaching a deal with commercial creditors. Commercial creditors accepted to receiving three cents for every dollar they were owed by the African country. This recent debt relief by the Paris Club should be another step in the right direction for Liberia by helping it further its economic and social development.

Discussion:1.Should the Paris Club have agreed to relieve $1.26 billion of Liberia’s debt? Why do these creditor countries agree to forgive developing countries debt? 2.Should more developed countries be taking steps like debt forgiveness to help less developed countries like Liberian build sustainable economies? What are the advantages and disadvantages of this?

Last week, Greek finance minister George Papaconstantinou went on visits to London, Paris and Frankfurt to persuade investors that Greece is recovering from its financial crisis in an attempt to build its credibility and persuade foreign investors to buy Greek debt. Greece has made significant changes since it revealed that it misled the European Union regarding its economic viability. On his European tour, Papaconstantinou confirmed that Greece reduced public sector wages and salaries by 15% and cut operating costs by 50%. In spite of these changes, an IMF report released on September 14, 2010 revealed that Greece still needs to improve tax collection and control spending in order to bring its economy to a sustainable level.

Papaconstantinou admits that Greece still has a long ways to go, and restructuring its debt is not an option. He stated that "if Greece restructures, why on earth would people invest in other peripheral economies? It would be a fundamental break to the unity of the euro zone." And with the support of the euro zone and the International Monetary Fund ("IMF"), it is seems unlikely that Greece will default. Some economists are now accusing investors of overestimating risk in the Greek investments. (See EU Commission: Fears of Greece Debt Restructuring Unfounded.) However, the IMF is sending mixed messages, arguing that the risk of Greece defaulting is overestimated, but that Greece has so much public debt that in order to stabilize it, the country will have to make greater financial adjustments than it has ever been able to produce. With so little stability, it is understandable that investors have been reluctant to invest in Greece again.

EU policy makers are in a bind; they need to encourage investors to invest in all euro zone countries and show that it is safe to invest in countries like Greece. However, with such high debt and low potential for growth, the only way to convince investors that it is safe to invest in Greece is for the EU to extend a bailout guarantee. The EU does not want to do this, as it would be politically unpopular, particularly for taxpayers in more stable countries that would have to fund the bailout. But the international community is doing as much as it can to help Greece. On September 19, for example, the IMF, European Central Bank and the European Commission announced that they would postpone the stress tests for Greek banks, which will examine the solvency of Greece's banking sector. This postponement will allow Greece additional time to recover and reap the potential benefits from the €1.7 billion in capital that the Bank of Greece has raised, which should improve confidence among investors.

Discussion Question: Has Greece done enough to ease the minds of investors who are considering investing in Greece or purchasing Greek debt?

In an effort to prevent a future financial crisis, the European Union (EU) agreed to create a European financial supervisory framework. "Financial companies and markets operate mostly at a European level, and we'll now have four solid authorities to monitor macroeconomic financial risks and to supervise financial markets, banks, and insurance companies," said Michel Barnier, the European Union Internal Market Commissioner.

The EU plans to establish four pan-EU financial supervisors: the European Systemic Risk Board (ESRB) and three European Supervision Authorities (ESAs). The ESRB will evaluate risks to financial stability across the EU and provide early warnings. Each of three ESAs will be responsible for overseeing banking, insurance and securities markets. The ESAs will develop common technical rules and standards. Although the ESAs will not directly supervise financial institutions, they will be able to investigate risky financial products and financial activities. And in "emergency situations," they will have power to ban or restrict risky products and activities.

Although this "European radar screen" is expected to provide better oversight of cross-border financial activities in Europe, some countries including the UK fear that national authorities may have less regulatory or supervisory power. The ESRB and ESAs will be operational by January 2011 after obtaining approvals from the European parliament and the member states. For the initial five years, the president of the European Central Bank will chair the ESRB.

Discussion:1. One of the controversial issues is the chairmanship of the ESRB. The European parliament wants the ECB president to be the chairman while the member countries want to make the decision by themselves. Initially, the ECB president will chair the ESRB, but this issue will be reviewed in three years. What are the pros and cons of designating the ECB president as the chairman of the ESRB?2. The status of financial market development is different for each member state. How can the new EU-level watchdogs develop common rules and standards while balancing different interests of each country?

The American airwaves were shocked earlier this month when Jeffery Goldberg, a journalist with The Atlantic, announced that Fidel Castro said the Cuban economic model is not worth exporting because it does not even work for Cuba anymore. Many people’s first reaction to the quote was that someone had misunderstood Castro’s Spanish—not that the leader of one of the world’s most famous revolutions had admitted that his entire endeavor was all for naught. Castro himself backtracked, saying that he meant the opposite: that the American model no longer works even for the United States, and therefore is not worth exporting.

Julia Sweig, a leading expert on Latin America with the Council of Foreign Relations who was present at the Goldberg-Castro interview, affirmed that Castro had indeed said that the Cuban model no longer worked, but offered as an explanation that Castro was trying to reassure Cubans that admitting the Cuban model does not work does not mean that Cuba will be shifting to the American model.

A second bombshell coming out of Cuba was current President Raul Castro’s announcement that 500,000 state workers will be laid off. The outside world has long hoped that Raul would spur the dramatic changes that most people agree Cuba needs, but until this announcement his policies have shown only muted differences from those of his brother. Now he is signaling a shift towards the development of the private sector in the country where approximately 85% of workers are state-employed.

According to the Cuban government, the laid-off workers will be encouraged to seek employment in the almost non-existent private sector. Some see this as a relegation of those employees to unemployment for the foreseeable future, while others (including Sweig) believe that the economy is in such need of reform that the private sector will easily swell to absorb these new job seekers. Some have suggested that this is a clear overture to the United States, signaling that Cuba is ready to negotiate and change the status quo of the U.S.-Cuba relationship, but only time will tell if this is the beginning of a major shift towards capitalism, or a minor shift in the course of the Cuban Revolution.

Discussion:1) What do you make of Fidel Castro’s comments about the Cuban economic model?2) Over the course of the Cuban Revolution the government has at various times attempted what many would deem capitalist reforms during dire economic times. Once the economy re-stabilized those reforms have always either been entirely revoked or dramatically scaled back. Will the current move towards a larger private sector have staying power, or do you think this is a temporary reform that will be scaled down as the Cuban economy recovers?3) Is now the time for the U.S. to reconsider the trade embargo? The travel restriction? Or, is now the time for the U.S. to begin negotiations with Cuba over all issues? Should the U.S. government wait longer to see how these changes play out before making any move? Would that risk a further chilling of the relationship if Cuba interprets the U.S.’s inaction as a lack of reciprocity?

Friday, September 17, 2010

In late 2009, the Pasok Party came to power in Greece, replacing the more conservative New Democracy Party. Following the transition, the new government officials discovered that the Greek economy was in shambles. The new Prime Minister, George Papandreou, decided that he had to come clean about the financial state of the country. He revealed years' worth of fixed statistics and added Greece to the list of countries facing economic ruin following the global financial crisis.

So what went wrong in Greece? Fraud, unrestrained spending, cheap lending, and little to no governmental oversight over tax payments and financial institutions all played a role. Public sector spending grew significantly. In the past ten years, the salary for the average government employee doubled, making it three times that of a Greek working in the private sector. The retirement age in Greece is also quite low; for most jobs, it is 55 years for men and 50 years for women, at which point retirees are entitled to collect generous pensions from the government.

Greece also has a serious tax enforcement problem, and it is common knowledge that most individuals and corporations do not pay what they owe. If an individual was to get caught cheating on his taxes, he could probably bribe the tax collector and resolve the issue. The court systems are notoriously inefficient in Greece, and cases may take up to 15 years to resolve. So, it is likely that even if someone did get caught cheating on his or her taxes, nothing would ever come of it.

Greek officials have also been manipulating the country's financial statistics for years. Since Greece adopted the Euro, it has had to maintain budget deficits below 3% G.D.P. In 2009, however, an International Monetary Fund ("IMF") investigation revealed that Greece's actual budget deficit was closer to 15%, suggesting that the numbers had been inaccurate all along and that Greece had violated euro zone rules.

This financial crisis resulted in the IMF and the European Central Bank ("ECB") loaning Greece, a nation of 11 million people, €110 billion ($145 billion), when Greece had an estimated $414 billion in total debts. Now, the global community is waiting to see how Greece will get out of this mountain of debt. If Greece defaults on its debt, the result could be disastrous for all of Europe.

Discussion: Should Europe have provided so much assistance to Greece after it became clear that Greece had manipulated statistics to show that its economy was much stronger than it was?

There is currently an ongoing debate between the Republican and Democratic Parties over how to address tax cuts. The 2000 presidential campaign first introduced tax cuts to the American public when both Bush and Gore pledged to use the cuts as a way to return a portion of the budget surplus to the American people. After the economic downturn in 2001, tax cuts were used as a stimulus for the economy. These Bush-era tax cuts spanned ten years and are set to expire in 2011.

In July, Obama proposed the extension of most of the Bush-era tax cuts, including those for households that earn less than $250,000 or single earners that make less than $200,000. However, Obama urged Congress not to renew the tax-cuts for wealthy Americans. Obama stated that extending the Bush-era tax cuts for wealthy Americans would mean the U.S. would forgo $700 billion in tax revenue from already extremely wealthy taxpayers. Obama criticized Republican leaders, who have been calling for the shrinking of the country’s deficit, for supporting the tax cuts on the wealthy because the taxation would provide a large source of revenue.

Although Obama has condemned members of the Republican Party for their lack of support for allowing tax cuts for the wealthy to expire, the Democratic Party is split over how to address tax cuts and deficit concerns. Key Democratic senators such as North Dakota’s Kent Conrad, Nebraska’s Ben Nelson, and Indiana’s Senator Evan Bayh have all expressed concerns with not renewing all the Bush-era tax cuts, including those for the wealthy. Conrad stated that he thought the best solution would be to not implement changes in the tax law until the economy was stable. Nelson agreed, saying that tax increases could hinder an already weak economy’s recovery.

The decision of whether or not to extend the tax cuts will have huge impact on Americans. The United States is slowly moving out of the recession, and a bad decision by Congress may cause increased economic hardship. It is unlikely that Republicans and Democrats will agree on a bill that addresses tax cuts in the next four weeks when November elections are looming. If Congress does not reach a solution before the November elections, they will be under increased pressure to act before January when the tax cuts expire.

The politics of post-November Congress will be further complicated because experts predict Republicans will unseat a significant number of Democrats. These newly-elected Republicans won’t take their seats in Congress until after the end of the year. This will result in a lame-duck session with neither party willing to negotiate solutions for the tax-cut problem. Some scholars suggest that Congress should have used the expiring tax cuts as a chance to address problems with the tax code itself, prompting an overdue reform to make the tax system both more efficient and less complicated. It is too late for such a reform now, and it might be too late for Congress to reach a much needed solution to the United States Bush-era tax-cut problem before the year’s end.

Discussion Questions:1. Should Congress renew all of the Bush-era tax-cuts? What are some of the advantages and disadvantages of extending all the tax-cuts?2. What are some compromises Republican and Democrats might be able to reach concerning tax-cuts?3. If Congress fails to act before November, how can a lame-duck session solve the tax-cut situation?

The United Steelworkers Union ("USW") filed a petition on September 9 demanding that the Obama Administration investigate China's clean energy policies. USW is the largest labor union in the United States and represents workers in a wide range of jobs related to clean energy, including manufacturers who make steel for wind turbine towers and nuclear reactors, glassmakers who make solar panels, and manufacturers of other components for clean energy equipment.

In their petition, the USW argues that China has violated World Trade Organization ("WTO") rules by subsidizing exports of clean energy equipment to the United States and Europe. Specifically, the USW claims that the assistance that the Chinese government has given clean energy manufacturers and exporters, by providing them with free or very cheap land for their plants, is in violation of the international trade rules which China and most other countries have adopted. China's government also supports its clean energy sector by spending $1 billion a day on interventions in the currency markets to keep the yuan artificially low, ensuring that Chinese exports are as affordable as possible in foreign markets. These interventions are in violation of the International Monetary Fund's ("IMF)" rules, which China should be following as an IMF member. Further, Chinese clean energy companies have benefited because China has restricted the export of rare earth elements, which are necessary to manufacture wind turbines, solar panels, and fluorescent bulbs. Nearly all of the world's rare earth elements come from China. This restriction is also in violation of WTO rules.

To be sure, China's clean energy sector has been very successful, and currently employs 1 million Chinese. In fact, China is on pace to produce over half of the world's solar panels within the next year. However, because China's clean energy sector relies so heavily on governmental support, it may be vulnerable if the state runs into financial problems. The United Steelworkers Union is hoping that its suit will successfully slow down the competition and ultimately result in an improved clean-energy sector in the United States.

Discussion questions:

(1) Is China's success in the clean energy sector a result of its ignoring international trade rules, or is it due to the ingenuity of its citizens, its growing number of talented engineers, low manufacturing costs, and commitment to the development of clean energy? (2) How much are the United States and other purchasers of Chinese clean energy benefiting from China's production of cheap clean energy? For example, Chinese wind turbines sell for $685,000 per megawatt of capacity, while Western wind turbines sell for $850,000 per megawatt of capacity.

Pakistan is currently enduring possibly its worst natural disaster in history. The UN estimates that so far 1,750 people have died, 1.8 million homes are either destroyed or damaged, 6 million people are homeless, and 21 million people have been affected in some way due to massive flooding affecting one-fifth of the country’s entire territory.

The world’s financial institutions have pledged millions to support the country. The World Bank increased its pledge last week to $1 billion. The money is meant to help finance both the immediate recovery needs and long-term reconstruction projects. It comes from International Development Association (part of the WB) funds already earmarked for Pakistan. These loans carry a longer term for repayment and are interest-free. The IMF agreed to make $450 million available within the next month as immediate emergency relief. This money is on top of the $7.3 billion already available as part of the Stand-By Arrangement in place since November 2008 whose terms also might be renegotiated as a result of the flooding.

The UN originally called for $460 million in global relief for the country, but has asked for more money in recent days. So far pledges have amounted to only 64% of the original request. The U.S. alone has pledged $150 million. Pakistan itself is requesting countries cancel some of its outstanding debts (which will reach $74 billion by 2014) as an additional form of relief. It argues that the flooding justifies this action under the UN Human Rights Commission “State of Necessity” resolution. Pakistan has also mentioned that 70% of its international debt was accrued by dictatorial governments as further justification for its request for debt repudiation.

All of these institutions have raised fears that Pakistan is not receiving enough money to properly cope with the crisis, citing possible donor exhaustion following large fundraising campaigns after major earthquakes in Haiti and Chile. Some also blame the relatively low death toll for creating the international perception that the situation is not as bad as it is.

Discussion:1) In light of the fear of “donor exhaustion,” do you think it is the world’s responsibility to come to the aid of other countries when natural disaster strikes? If yes, do you think this responsibility should extend to providing assistance to countries that are in dire straits no matter the cause? 2) Would it be moral for countries to limit their assistance to those countries with which it has some kind of political tie (for example, the U.S. giving aid to Pakistan because it sees it as an important ally in the war in Afghanistan)?3) Should the UN be able to require countries to donate to disaster-stricken countries?4) Does the fact that a dictator accrued a country’s foreign debt provide sufficient justification for international debt repudiation?

Frustration regarding unemployment is on the rise throughout the Euro zone— the sixteen European Union member states that have adopted the euro as their sole currency. In July, for the fifth straight month, unemployment in this region held at 10%, the highest unemployment rate it has experienced since 1998, and above the current U.S. jobless rate of 9.5%. Eurostat, the official statistics agency of the EU, said that these unemployment rates have resulted in 15.833 million people without jobs in the sixteen Euro zone states, and 23 million unemployed in the EU27, which includes all 27 nations of the European Union, including those that do not use the euro. Even though the unemployment crisis has affected all of Europe, it has not fallen evenly across the area.

Austria and the Netherlands have the lowest unemployment rates in the Euro zone, at a mere 3.8% and 4.4%, respectively. Germany has also weathered the economic downturn well and is now helping to bail out some of its European neighbors, including Greece and Spain. German businesses have become more competitive in recent years, and Germany's unemployment rate actually decreased to 6.9% in July. The economic outlook in many other Euro zone nations is in stark contrast to this prosperity. Spain suffers the highest unemployment rate in the Euro zone at 20.3%.

One laid-off Spanish construction worker, Doney Ramirez, has spent the past four months protesting the irresponsible actions of his employer, which borrowed too much money when it was readily available, and now can't pay off its debts. This led to the downfall of the company and the termination of Ramirez's job. After the construction company failed, Ramirez broke in to the site and scaled the crane where he has stayed for the last four months, claiming that he will not come down until he is paid his wages. Former colleagues hoist food to him, and he remains steadfast in his mission of getting his message about irresponsible borrowing across. He is just one example of a European worker who has suffered because his employer took on too much risky debt, in a country that took on too much debt after switching to the euro.

As unemployment continues to be an issue across the Euro zone, frustrations will continue to grow. Some Europeans are now beginning to question whether the euro will survive this period of economic hardship.

Discussion Question: Should the European nations that have weathered the economic downturn relatively well, such as Germany, be expected to bail out their neighbors that have not fared as well, such as Spain and Greece?

South Africa is currently a country in crisis. A strike of around 1.3 million public-sector employees, which started on August 18, is causing chaos in the country. Services such as hospitals and schools are closed due to the strike. The walkout is costing the South African economy an estimated 1 billion rand ($138,300,000) per day. The public-sector workers are demanding an 8.6% increase in wages, as well as a 1,000 rand ($138) housing allowance. The South African government argues that the wage increase, which is double the inflation rate, is too costly. The government’s “final” offer to the workers was a 7% increase with a 700 rand allowance for housing, which the union refused to accept.

At this time, the biggest threat to the South African economy is the potential actions of the country’s largest union, the Congress of South African Trade Unions (COSATU). In trying to persuade the government to give in to the public-sector workers’ demands, COSATU is threatening to put all of its members, including mining and manufacturing workers, on a sympathy strike. A strike of COSATU’s two million members would exacerbate the existing struggles of the South African economy. Sympathy strikes have already been a problem for the South African government. Despite a court order, on August 24, thousands of municipal garbage collectors held a one-day sympathy strike which led to problems with refuse collections throughout the country’s major cities.

COSATU holds considerable power in the public sector and has consistently arranged raises for public-sector union workers that were well above inflation rates. In fact, public-sector workers’ wages have increased 34% over the last five years. Recently, the government has been trying to draw attention to the problems that consistent wages increases are causing. The country’s Finance Minister, Pravin Gordhan, addressed governmental concerns about the wage increases last February. Gordhan argued that the government could no longer handle the high wage increases, citing the last year’s increase of 13% as being the source of substantial stress on the country’s budget. If the government acquiesces to the wage increase demands this year, the government will be over budget by almost 8 billion rand. Government officials state that more money used to pay public-sector wages will mean less funds will go to essential services, such as road construction, education, and health care.

The strike has already been a significant burden on South Africa’s lower class, many of whom are already unable to pay for private education or health care. If the government agrees to the union demands, a significant portion of the country’s budget will be used towards wage increases for the public sector. This will make it increasingly hard for the government to address the country’s unemployment problems. Only about 40% of the country’s working-age population has a job, which is strikingly low for middle-income emerging markets like South Africa’s (most are around 60-75%). The official unemployment rate is 25%, but experts estimate that it is closer to 36% if those who have given up looking for jobs are counted. Analysts think that the government will give into union demands, but it might not be best option for the South African economy and people, many of whom will not have a job much less a pay increase.

Discussion Questions:

1. Should the South African government agree to the public-sector workers’ increased wage demands?2. In what other ways might the increased wages hurt the South African economy? Is there any way the payment of increased wages in the public-sector might help the economy?

Despite the fact that most of the world has still not completely shaken off the global recession, Latin America has clearly set itself apart as countries across the region are experiencing their best growth rates in years. The International Monetary Fund (IMF) is predicting that Chile’s economy will expand by 6% this year (in terms of Gross Domestic Income). This growth is thanks to effective reconstruction spending following the massive earthquake on February 27 of this year and a rise in commodity prices. This growth will far outstrip the IMF’s prediction for global expansion of only 4.2% for the year.

Peru and Mexico are experiencing equally impressive levels of growth as well. Standard & Poor’s is predicting growth of 7.5% (in terms of Gross Domestic Product) for the year in Peru, though the Peruvian government is predicting only 6%. Peru is also benefiting from high commodity prices, but the Minister of Economy credits higher domestic demand and private investment as the main source of growth. The Bank of Mexico is predicting an annual growth rate between 4-5% (GDP) this year driven by a strong recovery in the country’s manufacturing sector. Mexico’s economy expanded at the fastest rate in over a decade in the second quarter this year.

The industrial sector pushed Brazil’s growth to 8.4% (GDP) in the first half of 2010 compared to the first half of 2009, and the IMF is predicting a growth rate of 4.1% (GDP) for the year. Ironically, like most of Latin America, second-half growth rates will likely decline in Brazil due to the fact that the country had already exited the recession and was again experiencing growth by the end of last year, making the year-to-year comparison less favorable. Even Argentina, a country with a less-than-stellar economic record since its 2001 economic collapse, saw growth of 11.1% (GDP) in June 2010 as compared to June 2009 after an excellent agricultural harvest.

One country bucking the growth trend is Venezuela. The Venezuelan economy shrank 3.5% (GDP) in the first half of 2010 after shrinking 3.3% in 2009. The government blames its financial woes on low global oil prices (oil makes up 95% of Venezuela’s export earnings), while government critics blame the country’s socialist economic policies and low consumer demand and investment for the poor showing.

Discussion:1) After famously suffering through the “Lost Decade” of the 1980’s many Latin American countries have shifted to more democratic governing systems and have experienced subsequent economic growth. Does the fact that Latin America appears to have already exited the global recession and returned to the excellent growth rates it had been experiencing in recent years signal that the region as a whole is on a path to first-world status, or should the world continue to be wary of the historically troubled region?

In June, the Group of 20 nations (G20) promised to implement new international rules that would require banks to increase the amount and quality of their capital. The rules are intended as measures to prevent another financial crisis and to strengthen the resilience of the banking sector. However, the banking industry has voiced concerns, arguing that raising capital requirements would increase cost of capital, cut lending, and negatively affect the global economic recovery. According to the Institute of International Finance, the new rules would reduce the gross domestic product (GDP) by three percentage points in the U.S., the euro zone, and Japan by 2015.

In contrast, recent studies published by the Financial Stability Board (FSB) and Basel Committee on Banking Supervision (BCBS) demonstrate that the long-term benefits of raising more capital are "substantial" despite "manageable" short-term costs. According to the studies, when banks are required to raise their capital by three percentage points within four years, the absolute level of GDP would decrease by 0.6 percentage points. However, the global economy would ultimately benefit as more bank capital would lower the frequency and severity of bank crises. The net increase in absolute GDP is estimated to be around 1.7 percentage points.

Mr. Mario Draghi, Chairman of the FSB and Governor of the Bank of Italy, emphasized the importance of "appropriate phase-in arrangements" for the new rules. If banks have time to adjust to the new rules, they can reduce the short-term costs (e.g., increased loan cost or loan reduction) by using other "adjustment mechanisms" such as reducing costs, issuing equity, retaining profits, etc. In July, the BCBS postponed the implementation date-- the rules will not take full effect until 2018. The FSB and the BCBS are expected to finalize the rules before the next G20 meeting in Korea in November.

Discussion Questions: Will banks be able to survive another financial crisis without using taxpayers’ money if they increase the level and quality of capital according to the new rules? Will the new rules harm banks?

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